Phillips Petroleum Company v. Wisconsin/Opinion of the Court

These cases present a common question concerning the jurisdiction of the Federal Power Commission over the rates charged by a natural-gas producer and gatherer in the sale in interstate commerce of such gas for resale. All three cases are an outgrowth of the same proceeding before the Power Commission and involve the same facts and issues.

The Phillips Petroleum Company is a large integrated oil company which also engages in the production, gethering, processing, and sale of natural gas. We are here concerned only with the natural-gas operations. Phillips is known as an 'independent' natural-gas producer in that it does not engage in the interstate transmission of gas from the producing fields to consumer markets and is not affiliated with any interstate natural-gas pipeline company. As revealed by the record before us, however, Phillips does sell natural gas to five interstate pipeline transmission companies which transport and resell the gas to consumers and local distributing companies in fourteen states.

Approximately 50% of this gas is produced by Phillips, and the remainder is purchased from other producers. A substantial part is casinghead gas-i.e., produced in connection with the production of oil. The gas flows from the producing wells, in most instances at well pressure, through a network of converging pipelines of progressively larger size to one of twelve processing plants, where extractable products and impurities are removed. Of the nine such networks of pipelines involved in these cases, five are located entirely in Texas, one in Oklahoma, one in New Mexico, and two extend into both Texas and Oklahoma. After processing is completed, the gas flows from the processing plant through an outlet pipe, of varying lengths up to a few hundred feet, to a delivery point where the gas is sold and delivered to an interstate pipeline company. The gas then continues its flow through the interstate pipeline system until delivered in other states.

The Federal Power Commission, on October 28, 1948, instituted an investigation to determine whether Phillips is a natural-gas company within the jurisdiction of the Commission, and, if so, whether its natural-gas rates are unjust or unreasonable. In extensive hearings before an examiner, the facts described above were developed, as well as much additional information. An intermediate decision having been dispensed with, the Commission issued an opinion and order in which it held that Phillips is not a 'natural-gas company' within the meaning of that term as used in the Natural Gas Act, and therefore is not within the Commission's jurisdiction over rates. Consequently, the Commission did not proceed to investigate the reasonableness of the rates charged by Phillips. On appeals, the decision of the Commission was reversed by the Court of Appeals for the District of Columbia, one judge dissenting. 92 U.S.App.D.C. 284, 205 F.2d 706. We granted certiorari. 346 U.S. 934-935, 74 S.Ct. 374-376.

The Power Commission is authorized by § 4 of the Natural Gas Act to regulate the 'rates and charges made, demanded, or received by any natural-gas company for or in connection with the transportation or sale of natural gas subject to the jurisdiction of the Commission * *  * .' 'Natural-gas company' is defined by § 2(6) of the Act to mean 'a person engaged in the transportation of natural gas in interstate commerce, or the sale in interstate commerce of such gas for resale.' The jurisdiction of the Commission is set forth in § 1(b) as follows:

'The provisions of this Act shall apply to the transportation     of natural gas in interstate commerce, to the sale in      interstate commerce of natural gas for resale for ultimate      public consumption for domestic, commercial, industrial, or      any other use, and to natural-gas companies engaged in such      transportation or sale, but shall not apply to any other      transportation or sale of natural gas or to the local      distribution of natural gas or to the facilities used for      such distribution or to the production or gathering of      natural gas.' Petitioners admit that Phillips engages in 'the sale in interstate commerce of natural gas for resale', as, of course, they must. Interstate Natural Gas Co. v. Federal Power Commission, 331 U.S. 682, 687-689, 67 S.Ct. 1482, 1485-1487, 91 L.Ed. 1742; cf. Michigan-Wisconsin Pipe Line Co. v. Calvert, 347 U.S. 157, 166 168, 74 S.Ct. 396, 401-403. They contend, however, that the affirmative grant of jurisdiction over such sales in the first clause of § 1(b) is limited by the negative second clause of the section. In particular, the contention is made that the sales by Phillips are a part of the 'production or gathering of natural gas' to which the Commission's jurisdiction expressly does not extend.

We do not agree. In our view, the statutory language, the pertinent legislative history, and the past decisions of this Court all support the conclusion of the Court of Appeals that Phillips is a 'natural-gas company' within the meaning of that term as defined in the Natural Gas Act, and that its sales in interstate commerce of natural gas for resale are subject to the jurisdiction of and regulation by the Federal Power Commission.

The Commission found that Phillips' sales are part of the production and gathering process, or are 'at least an exempt incident thereof.' This determination appears to have been based primarily on the Commission's reading of legislative history and its interpretation of certain decisions of this Court. Also, there is some testimony in the record to the effect that the meaning of 'gathering' commonly accepted in the natural-gas industry comprehends the sales incident to the physical activity of collecting and processing the gas. Petitioners contend that the Commission's finding has a reasonable basis in law and is supported by substantial evidence of record and therefore should be accepted by the courts, particularly since the Commission has 'consistently' interpreted the Act as not conferring jurisdiction over companies such as Phillips. See Gray v. Powell, 314 U.S. 402, 62 S.Ct. 326, 86 L.Ed. 301; National Labor Relations Board v. Hearst Publications, Inc., 322 U.S. 111, 64 S.Ct. 851, 88 L.Ed. 1170. We are of the opinion, however, that the finding is without adequate basis in law, and that production and gathering, in the sense that those terms are used in § 1(b), end before the sales by Phillips occur.

In Federal Power Commission v. Panhandle Eastern Pipe Line Co., 337 U.S. 498, 505, 69 S.Ct. 1251, 1256, 93 L.Ed. 1499, we observed that the 'natural and clear meaning' of the phrase 'production or gathering of natural gas' is that it encompasses 'the producing properties and gathering facilities of a natural-gas company.' Similarly, in Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 598, 65 S.Ct. 829, 837, 89 L.Ed. 1206, we stated that '(t)ransportation and sale do not include production or gathering', and indicated that the 'production or gathering' exemption applies to the physical activities, facilities, and properties used in the production and gathering of natural gas. Id., 324 U.S. at pages 602-603, 65 S.Ct. at page 839. See also Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 612-615, 64 S.Ct. 281, 292-294, 88 L.Ed. 333; Peoples Natural Gas Co. v. Federal Power Commission, 75 U.S.App.D.C. 235, 127 F.2d 153; cf. United States v. Public Utilities Commission, 345 U.S. 295, 307-311, 73 S.Ct. 706, 713 716, 97 L.Ed. 1020.

Even more directly in point is our decision in Interstate Natural Gas Co. v. Federal Power Commission, 331 U.S. 682, 67 S.Ct. 1482, 91 L.Ed. 1742. The Interstate Company produced or purchased natural gas which it in turn sold and delivered to three interstate pipeline companies, all the activities occurring within the same state. We noted that '(e)xceptions to the primary grant of jurisdiction in the section (1(b)) are to be strictly construed', id., 331 U.S. at pages 690-691, 67 Stat. at page 1487, and held that § 1(b) conferred jurisdiction over such sales on the Federal Power Commission, stating:

'Petitioner asserts * *  * that the sales to the three pipe      line companies are a part of the gathering process and      consequently not within the Commission's power of regulation. This basic contention has given rise to a great many     subsidiary questions such as whether the sales were made from      petitioner's 'gathering' lines or from petitioner's      transmission' lines and whether the gathering process      continued to the points of sale or was, as the Commission found, completed at      some point prior to surrender of custody and passage of      title. We have found it unnecessary to resolve those issues. The gas moved by petitioner to the points of sale consisted     of gas produced from petitioner's wells commingled with that      produced and gathered by other companies and introduced into      petitioner's pipe line system during the course of the      movement. By the time the sales are consummated, nothing     further in the gathering process remains to be done. We have     held that these sales are in interstate commerce. It cannot     be doubted that their regulation is predominantly a matter of      national, as contrasted to local concern. All the gas sold in     these transactions is destined for consumption in States      other than Louisiana. Unreasonable charges exacted at this     stage of the interstate movement become perpetuated in large      part in fixed items of costs which must be covered by rates      charged subsequent purchasers of the gas including the      ultimate consumer. It was to avoid such situations that the     Natural Gas Act was passed.' Id., 331 U.S. at pages 692-693,      67 S.Ct. at page 1488.

Petitioners attempt to distinguish the Interstate case on the grounds that the Interstate Company transported the gas in its pipelines after completion of gathering and before sake, and that the Interstate Company was affiliated with an interstate pipeline company and therefore subject to Commission jurisdiction in any event. This Court, however, refused to rely on such refinements and instead based its decision in Interstate on the broader ground that sales in interstate commerce for resale by producers to interstate pipeline companies do not come within the 'production or gathering' exemption.

The Interstate case is also said to be distinguishable in that it did not involve an asserted conflict with state regulation, and federal control was not opposed by the state authorities, while in the instant cases there are said to be conflicting state regulations, and federal jurisdiction is vigorously opposed by the producing states. The short answer to this contention is that the jurisdiction of the Federal Power Commission was not intended to vary from state to state, depending upon the degree of state regulation and of state opposition to federal control. We expressly rejected any implication to the contrary, in the Interstate case. 331 U.S., at pages 691-692, 67 S.Ct. at pages 1487-1488. See Federal Power Commission v. Hope Natural Gas Co., supra, 320 U.S. at pages 607-615, 64 S.Ct. at pages 290-294.

The cases discussed above supply a ready answer to the determination of the Commission and also to petitioners' suggestion that 'production or gathering' should be construed to mean the 'business' of production and gathering, with the sale of the product considered as an integral part of such 'business.' We see no reason to depart from our previous decisions, especially since they are consistent with the language and legislative history of the Natural Gas Act.

In general, petitioners contend that Congress intended to regulate only the interstate pipeline companies since certain alleged excesses of those companies were the evil which brought about the legislation. If such were the case, we have difficulty in perceiving why the Commission's jurisdiction over the transportation or sale for resale in interstate commerce of natural gas is granted in the disjunctive. It would have sufficed to give the Commission jurisdiction over only those natural-gas companies that engage in 'transportation' or 'transportation and sale for resale' in interstate commerce, if only interstate pipeline companies were intended to be covered. See Federal Power Commission v. East Ohio Gas Co., 338 U.S. 464, 468, 70 S.Ct. 266, 268, 94 L.Ed. 268.

Rather, we believe that the legislative history indicates a congressional intent to give the Commission jurisdiction over the rates of all wholesales of natural gas in interstate commerce, whether by a pipeline company or not and whether occurring before, during, or after transmission by an interstate pipeline company. There can be no dispute that the overriding congressional purpose was to plug the 'gap' in regulation of natural-gas companies resulting from judicial decisions prohibiting, on federal constitutional grounds, state regulation of many of the interstate commerce aspects of the natural-gas business. A significant part of this gap was created by cases holding that 'the regulation of wholesale rates of gas and electrical energy moving in interstate commerce is beyond the constitutional powers of the States.' Interstate Natural Gas Co. v. Federal Power Commission, supra, 331 U.S. at page 689, 67 S.Ct. at page 1487. The committee reports on the bill that became the Natural Gas Act specifically referred to two of these cases and to the necessity of federal regulation to occupy the hiatus created by them. Thus, we are satisfied that Congress sought to regulate wholesales of natural gas occurring at both ends of the interstate transmission systems.

Petitioners cite our recent decisions in Cities Service Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 71 S.Ct. 215, 95 L.Ed. 190, and Phillips Petroleum Co. v. State of Oklahoma, 340 U.S. 190, 71 S.Ct. 221, 95 L.Ed. 204, as authority for the proposition that the states may regulate the sales in question here and, hence, that such sales are not within the gap which the Natural Gas Act was intended to fill. Those cases upheld as constitutional state minimum price orders, justified as conservation measures, applying to sales of natural gas in interstate commerce. But it is well settled that the gap referred to is that thought to exist at the time the Natural Gas Act was passed, and the jurisdiction of the Commission is not affected by subsequent decisions of this Court which have somewhat loosened the constitutional restrictions on state activities affecting interstate commerce, in the absence of conflicting federal regulation. Illinois Natural Gas Co. v. Central Illinois Public Service Co., 314 U.S. 498, 508, 62 S.Ct. 384, 388, 86 L.Ed. 371; Federal Power Commission v. East Ohio Gas Co., supra, 338 U.S. at page 472. 70 S.Ct. at page 270. The Federal Power Commission did not participate in the Cities Service and Phillips Petroleum cases, the appellants there did not assert a possible conflict with federal authority under the Natural Gas Act, and consequently we expressly refused to consider at that time '(w)hether the Gas Act authorizes the Power Commission to set field prices on sales by independent producers, or leaves that function to the states * *  * .' 340 U.S., at pages 188-189, 71 S.Ct. at page 221.

Regulation of the sales in interstate commerce for resale made by a so-called independent natural-gas producer is not essentially different from regulation of such sales when made by an affiliate of an interstate pipeline company. In both cases, the rates charged may have a direct and substantial effect on the price paid by the ultimate consumers. Protection of consumers against exploitation at the hands of natural-gas companies was the primary aim of the Natural Gas Act. Federal Power Commission v. Hope Natural Gas Co., supra, 320 U.S. at page 610, 64 S.Ct. at page 291. Attempts to weaken this protection by amendatory legislation exempting independent natural-gas producers from federal regulation have repeatedly failed, and we refuse to achieve the same result by a strained interpretation of the existing statutory language.

The judgment is affirmed.

Affirmed.

Mr. Justice JACKSON took no part in the consideration or decision of these cases.